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FNCE 203 > Lecture 5 - Valuation > Flashcards

Lecture 5 - Valuation Flashcards

1
Q

DCF Valuation

A

firm value = cash0 + (FCF1)/(1+WACC) + (FCF2)/(1+WACC)….

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2
Q

cash included in DCF

A

EXCESS CASH

only include cash not needed for day-to-day operations; cash that is free to be paid out

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3
Q

DCF valuation steps

A
  1. find EXCESS cash today (cash0)
  2. find PV of FCF estimates over non-constant growth period
  3. find PV of horizon/TV of FCF in constant growth period
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4
Q

non-constant growth period

A

diff growth rates during period

ends only when we can assume growth is stable

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5
Q

constant growth period

A

value of firm in this period = TV

beginning in year N+1, we assume expected FCF will grow at constant rate g

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6
Q

TVn

A

PV of all future FCFs in constant growth period discounted back to year N

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7
Q

TVn =

A

(FCFn+1) / (WACC-g)

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8
Q

firm value

A

PV of all future cash flows and today’s cash

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9
Q

Equity value (MV) =

A

Firm value - debt

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10
Q

what price should you be willing to pay at time 0 for stock? =

A

P0 = equity value / # of shares

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11
Q

mid-year discounting

A

FCF discounted as mid year cash flows

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12
Q

firm value w/ mid-year discounting =

A

cash0 + (1 + r)^1/2 * (PV FCF & TV)

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13
Q

TV using book values =

A

= book value of assets

= LT assets + NWC

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14
Q

TV using book values

A

a reasonable lower bound for a firm future value = future book value of assets

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15
Q

why is TV using book values a lower bound?

A

bc we expect market values to rise above book values

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16
Q

TV using multiples

A

find firm with similar business risk, growth prospects, and leverage

use its market multiple to predict TV of firm

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17
Q

APV formula =

A

VL = Vu + PV (financial side effects)

18
Q

VL

A

value of project/firm accounting for how it’s financed

19
Q

Vu =

A

sum of PV of all FCF discounted by ra

Σ (FCFt) / (1 + rA)^t

20
Q

rA

A

unlevered return
return on assets
reflects only compensation for BUSINESS risk

21
Q

possible financial side effects

A

interest tax shields
cost of financial distress
agency costs of debt
direct cost of issuing equity/debt

22
Q

discount future tax shields by…

A

rD if firm is profitable
rA if firm is not profitable

appropriately accounts for riskiness

23
Q

interest tax shields =

A

rD * D * T
(calculate for every year)
how much expected cash flows the firm saves on taxes bc of interest expenses

24
Q

loans: principal @start of year =

A

(last year’s debt amount) * (1+rd) - equal payment

25
Q

advantage of using APV

A

works well with time-varying D/V

gives clear picture of exactly how financing affects project value

26
Q

tax shields are accounted for in WACC & APV by….

A

WACC - thru the discount rate

APV - thru financial side effects

27
Q

WACC & APV make following assumptions about D/E

A

WACC - assumes constant D/E

APV - gives simple way to account for changes in D/E

28
Q

EVA =

A

Cn - r*I

Cn = CF in period n (ex. FCF)
r = opp cost of capital (ex. WACC)
assumes you are tying up capital I forever

29
Q

EVA investment rule

A

make investment if PV of all future EVA’s discounted at cost of capital (r) is positive

30
Q

PV (EVA) =

A

Σ Cn / (1+r)^n - I = NPV

31
Q

5 steps to multiples

A
  1. find comparable firms
  2. choose many scaling bases (EBIT, sales)
  3. calculate ave multiple for each scaling factor for comparable firms
  4. come up with projection for scaling factor for your firm
  5. use various multiples and projections to arrive at valuation
32
Q

EPS =

A

NI / Shares outstanding

33
Q

PE ratio =

A

Price per share / Earnings per share

how much investors are willing to pay per dollar of current earnings

34
Q

higher PE ratio usually means….

A

firm has significant growth prospects / low expected returns

35
Q

constant dividend growth model =

A

P0 = (DPS1) / (rE-g)

36
Q

how does g impact PE ratio?

A

higher g = higher PE ratio

37
Q

how does rE impact PE ratio?

A

higher rE (expected return) = lower PE ratio

38
Q

how does payout ratio impact PE ratio?

A

higher payout ratio = higher PE ratio

39
Q

if PEf > PEm

fundamental PE > market PE

A

stock is undervalued

should BUY stock

40
Q

if PEf

A

SELL stock

41
Q

PEf =

A

[b * (1 + g)] / (rE - g)

42
Q

PEm =

A

P0 / EPS0

FNCE 203 (9 decks)

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